Managing cross-border clients

By Matt Bell | October 05 2016 07:00AM

Managing cross-border clients is a challenging area for advisors that requires thorough knowledge on how to handle life insurance, investments, taxes and pensions while respecting two countries’ rules and regulations.

The Insurance and Investment Journal spoke to U.S-Canada cross-border expert Terry Ritchie, a director at Cardinal Point Wealth Management, who’s specialised in the field for more than 25 years to find some answers. He says if you don’t have knowledge or experience it is very easy to mess things up for your client.

“The (advisor) should talk to a cross border planner or talk to a tax person, that has some experience in this area. If you don’t do things properly you’re very likely going to screw things up,” say Ritchie.

Compared to other areas of cross border client management, life insurance is more straight forward but still has it is hurdles, Ritchie says.

“The problem in a cross border context is that if somebody buys insurance and that under U.S. estate laws would be defined as having incidents of ownership and meets of one of five criteria’s, than for US estate tax purposes, the life insurance is subject to inclusion as part of the U.S. gross estate.”

The criteria include:

  1. pay the premium,
  2. change the beneficiary,
  3. own the contract,
  4. borrow from the policy and,
  5. can they assign the cash value to a bank.

Ritchie says most clients usually meet one of these requirements and therefore the policy would be included within the U.S. estate and could create planning challenges.

“In the old days, when the estate tax exemption was low (now it’s $5.45 million) it wasn’t that big of a deal. Now if the client is worth $2 million dollars and also has $2 million dollars in life insurance held personally…for a U.S estate tax purposes, they are really worth $4 million,” he explains.

Ritchie says when advisors do estate planning they need to look at the role of insurance and whether having insurance will put somebody offside for U.S estate tax reasons. If that is the case, they can do a few things including setting up a separate an irrevocable trust for the insurance.

“The trust is the premium payer and the owner of the insurance. If you do that before the insurance is purchased, it won’t form part of the U.S estate tax,” he says.

Another simple option, that avoids legal obstacles is for somebody to purchase life insurance on behalf of the client, perhaps their son or daughter.


Dealing with pensions can be difficult as every situation is different. For Canadians moving to the U.S, Ritchie says it isn’t in their best interests to collapse their RSP before they move because of Canadian tax implications. But it could make sense later as a non resident of Canada.

“Under the US/ Canada tax treaty, the maximum tax for collapsing the full pension is a withholding tax of 25 per cent. The US will impose a tax, based off the fair market value of the RSP from the point you established US tax residency,” says Ritchie.

Personally, he is not for this plan since if you withdraw the money down the road, there is only a 15 per cent withholding, providing you meet certain guidelines.

He says he gets phone calls from concerned Canadian advisors about having a client or a prospect with US dollar assets and wondering what can they do.

“Canada allows the transfer of IRA’s and 401k to Canada that can be rolled over to a RSP, so there is a shelter that doesn’t apply on the US side. The problem is, if it is a former American who isn’t a citizen or green card holder, then they pay a 15 per cent withholding tax in the right time frame,” says Ritchie.

The bigger problem is for a citizen or green card holder who still has filing requirements in the United States – any distribution of their IRA or 401k will be taxed as ordinary income.

“Their IRA or 401k will be fully taxed in Canada and in the US, so the US could go ahead and impose a tax as high as 43 per cent. So that is not something we recommend,” he says.  Further, if the plan is collapsed prior to their age of 59 ½, an additional 10% penalty will apply.

Taxation might be the most complicated issue for cross-border clients and every client is different when it comes to their filing requirements. For snowbirds – Canadians who winter down south – it is a question of how long can they legally stay in the U.S. without paying tax and so forth. Currently, the U.S allows Canadians in the U.S up to 183 days without paying tax. The other issue is that the U.S imposes tax residency based off the number of days a Canadian is in the U.S.

Ritchie says this is calculated over a three-year-period under the substantial presence test which means Canadians need to be aware of the number of days in the current tax year, then they need to add a third of the number of days from the previous year and one sixth of third year. If the number is greater than 183 days, under U.S rules, the Canadian becomes an U.S tax resident.

“However there is an expectation that as long as the Canadian is not renting property or selling US property, they can file an IRS form 8840 – The Close Connection Exception Statement, which means you have followed the rules and you will now be exempt from the filing of a full U.S. tax return,” he says.


When it comes to investments, Canadians can invest and purchase US stocks but could be exposed to US estate taxes if the value of investment is more than $60,000 or the client is worth more than $5.45 million (including life insurance under the rules above).

“We have to be careful how we own US stocks. So it could be better to own it in the form of a Canadian mutual fund or in an ETF. We have to aware of the tax implications. If not, US stocks could be subject to US estate tax by many Canadians” says Ritchie.

On the opposite side of the scale is that Americans cannot traditionally buy Canadian mutual funds. If they do, many would be considered by the US, to be passive foreign investment corporations (PFIC). This means they would be taxed in the US at rather punitive rates and would be subject to further tax compliance and reporting requirements.

Some advice

Ritchie says advisors with cross border clients need to do everything right or they could create cause headaches for their themselves and their clients.  Traditional Canadian planning does not always work well in cross border situations.

“Some advisors want to keep the assets for clients who live in the US and often play games to do so. The advisor might say, ‘let’s just put Uncle Joe’s address on the account so your account can stay here, so I can still manage them for you’. The problem is it totally compromises what we are telling the CRA, particularly if the client is a non resident of Canada for tax purposes.” he says.

With the new Foreign Account Tax Compliance Act (FATCA); Ritchie says when agents are filling out paper work they must acknowledge where the client lives. So, it’s harder to play such games. Ritchie says advisors who want to serve cross-border clients need to do the research and learn from others in the industry. He advises that it does take time to get your head around everything in this specialty.

“It is a great niche, it is a great area. I get lots of phone calls from people saying they want to do this and asking about how they can learn it.”